Background of Airline History
The process of globalization which gradually began after the end of the Second World War has brought about many important changes in the present world. The repercussions of the globalization process are still being felt in the present times. One of the most significant change of the contemporary times is the rapid rise in the airlines sector. Earlier, planes did not have the right or the freedom to fly through the airspace of another sovereign land because of security reasons (Atkinson 2011). The various countries of the War ridden world were wary of the malicious activities of the other countries and always lived in the fear that they will find a way to undermine their sovereign power. However, the end of the Second World War led to the signing of many agreements which were conducive for the free movement of goods and people across the lands for the purposes of promoting the processes of globalization and liberalization. This led to the gradual development of the airlines sector which was required for the purpose of cross border migration (Pels, Njegovan and Behrens 2017). This easy seeks to discuss the development of the airlines industry. For this purpose, it provides an analytical case study which looks into the alliances between major airways, such as the example of Oneworld. It also looks into the cross border acquisitions that took place between Lufthansa and Swiss Airlines. The essay concludes with the significance of the airlines sector in the lives of the people of the contemporary world.
In the earlier times, the planes were used to fight wars mainly. The first war in which the fighter planes were used was in the war between France and Prussia in the year 1870 (Dijkstra 2017). After the end of the war, an important question that arose was whether the airspaces in the sky above would be considered common amongst all the lands as in the case of the High Seas or would the airspaces be divided amongst the country lying underneath it. The next development in the field of airlines was in the form of Warsaw Convention of 1929 (Holloway 2017). This Convention was based on the issue of luggage carried by the people when they are on a commercial aircraft. The main objective of the Convention was to restrict the liability faced by an aircraft in the loss of luggage of a passenger or any incident that resulted in an injury of a fellow passenger. The next important Convention which was signed with regard to airspace was in the year 1944, known as the Chicago Convention (Mallikarjun 2015). The Chicago Convention led to the establishment of a world aviation forum known as the International Civil Aviation Organization. This organization came into operation on 5th March 1947, after being ratified by the member countries (Mallikarjun 2015). The main function of this organization is to work in harmony with the member countries in trying to reach a consensus on how the international standards for civil aviation will be framed. However, it was the time of the on-going Second World War where animosity was high and the struggle for gaining sovereignty was still being fought (Parise 2018). The various countries therefore, were insecure with the losing of what little sovereignty they had and did not want to compromise with it.
Alliances in Airlines
The airlines face many challenges related to the regulatory economy and environment. From the economic point of view, the establishment of the United Nations guaranteed to the countries of the world their right to sovereignty and that their right to self-rule would not be abridged under any circumstances (Iatrou and Oretti 2016). This led the countries to come to an arrangement that they would have sovereign control over the skies above their respective lands and that they would allow the aircrafts of other countries to pass through their skies only under regulation. Moreover, certain designated spots of skies would be restricted to the aircrafts and that the aircrafts would have to abide by such restrictions, failing which will result in an international breach. Such an arrangement has promoted the usage of aircrafts and in the modern contemporary world, there are many airlines with carriers of their own.
Airlines cause many significant problems for the environment (Yu, Chen and Chiang 2017). An aircraft consumes a lot of fuel which are the non-renewable resources of the earth. At a minimum there are about ten airlines which fly from one destination to another (Yu, Chen and Chiang 2017). The aircrafts also generates deafening noises during their take off and during landing. This rapidly increases the level of noise pollution faced by the people of a particular city in their daily lives. The health of the people inside an aircraft is also under risk due to the noise pollution created by the engines. Moreover, the pressure inside the aircraft varies from the atmospheric pressure outside and this results in the feeling of nausea and sickness among most of the travelling passengers. Continuous use of aircrafts, as a consequence, is harmful for the environment.
In their drive to capture a sizable market share and to conserve and protect the environment, the different airlines have adopted various strategies. One of the strategies adopted is that of entering into alliances. An alliance between two private organizations is a formal understanding that they will work together in the future under one common banner. The alliance agreement also spells out the share of revenue among the two concerned organizations and how they will handle any forthcoming potential risks (Thekinen et al. 2017). The main motive of entering into alliances is to have an upper hand with respect to the other competitors in the same market and to ensure that the alliance is the one which controls a significant share of the consumer base. The idea is that if the resources of two organizations are pooled together in achieving a common aim, the resources will be better utilized and will give effective results in terms of higher generation of profits. One of the examples of alliances in the airlines sector is Oneworld. It is the alliance primarily between American Alliances and British Airways and consist of seven different airlines of Iberia, LAN, Quantas, S7 Airlines, Cathay Pacific Airways, Japan Airlines, Finnair, Malev Hungarian Airlines, Royal Jordanian and Mexicana including the two. Such an alliance has been formed in order to control higher traffic of the consumers. Alliances also allows the different member organizations to operate in a more efficient manner. One of the various economies of scale that can be experienced in the case of an alliance in airlines is the improvement in the prices and the subsequent reduction in the burden of cost on the prospective consumers (Ellis 2016). The pooling of large resources, especially the financial resources, allow the different airlines engaged in alliance to reduce the cost charged from the consumers. The increased financial resources of the alliances allow the airlines to bargain collectively with the various sources of inputs and reduce their price. A reduction in the cost of manufacturing simultaneously leads to a reduction in the cost of the prices of the tickets. The main intention of reducing the prices of the tickets is to encourage more customers to buy the tickets (Belobaba, Odoni and Barnhart 2015). Customers will be willing to buy tickets which are less priced and this aspect gives the alliance a competitive advantage over the other individual competitors. As a result, the formation of an alliance is also competitively advantageous for the organizations as they can retain a higher consumer base which helps them to earn a higher profit margin (Wang 2014).
Mergers and Acquisitions in Airlines
Another aspect which can be noticed in the field of global competition is the feature of mergers and acquisitions. Mergers and acquisitions refer to that form of competition where an economically superior and domineering organization in the market tries to buy out another organization which is comparatively weaker in terms of finances and does not have such a dominating presence in the market (Douglas and Tan 2017). The weak and vulnerable position of the organization puts the said organization in need of help and financial assistance. It is such a scenario which leads to the economically dominant organization to merge with the other organization, or in the cases of dire situation where the other organization is nearing bankrupt, the financially superior organization can also acquire the other organization. The merger between airlines have originally taken place among the domestic airlines as airlines were considered to be the assets of security. In the olden days, airlines were strategic machines which were used in the conduction of warfare and destruction. As such, the suspicions of the past prevails even in the present times where countries are reluctant to allow the airline of another country to merge with the domestic airline or even acquire it (Kleymann, and Seristö 2017). However, in the contemporary world of today, the process of globalization and liberalization has allowed the prevalence of capitalist structure of society where finances is the only motivating factor.
Airlines are allowed to engage in cross border mergers and acquisitions such as experienced in the case of Lufthansa acquiring the Swiss Airlines. Lufthansa, a German Airline, wanted to buy out the Swiss Airlines for nearly two hundred and seventeen million pounds in the eyar of 2005 in March. However, the success of the deal depended on the performance of the airlines of Lufthansa’s share price in the next three year period. Lufthansa initially paid around forty five million pounds to the fifteen percent of the small stakeholders of the Swiss International Airlines (Lordan and Klophaus 2017). The remaining eighty five percent of the stakeholders had to be bought for three hundred million pounds and these shareholders wanted to judge the performance of Lufthansa which will be crucial in determining the buyout. Eventually, Lufthansa was successful in acquiring the Swiss International Airlines and now Lufthansa completely controls all the operations of the Swiss International Airlines.
The strategy of alliances between airlines and mergers and acquisitions are very purposeful to deal with the rising challenge of increased airline networks. There are many flights which cater to the same destinations during the same time period. This is due to the increase in the number of people availing the airline services. Coming under the banner of one airline will help the future formed version of airline to deal with the rising traffic and get a high return in terms of profit as the profits will be shared by one single airline instead amongst different smaller airlines.
Furthermore, the airlines will be able to tackle the problems of environmental degradation together by the means of corporate social responsibility. If the airlines form an alliance with each other or undergo mergers and acquisitions, then they will be able to pool their resources together. The increase in the available resources would mean that the responsibility to the improvement of the society will be met to a greater degree by the airlines. For instance, the airlines can innovate new machines will which help to deal with the problem of noise pollution. Moreover, they can invent new techniques which would help the aircrafts to consume lesser fuels.
Conclusion
In conclusion, it is observed that the process of globalization has changed the aviation sector to a great extent. The profit motives of the industries engaged in the airline sector has made the airlines undertake strategically important steps in order to counter the actions of the competitors. The main purpose of any private business is to generate more profits and this is only possible with the means of dominating a significant share of the market base, If more customers buy the products sold by a particular firm, chances are the generation of revenue of such a firm will be significantly higher. As a result of this, airlines have started to enter into the strategies of alliances and mergers or acquisitions. Alliances allow the different organizations to retain their individuality; the organizations simply pool their resources together and share their profits and losses on a predetermined ratio. They work together under one banner but they do not lose out their unique distinctions. Mergers and acquisitions on the other hand, means that one organization completely takes over another organization. There is no sharing of profits and losses amongst the concerned organizations. These strategies are considered to be important from the perspective of earning higher profits and customer satisfaction.
References:
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